Has the 'Great Stagnation' Hit the U.S.?

Feeling any more productive lately? The trend rate of productivity growth, as measured by the value of output per man-hour, appears to be increasing for the first time in a decade.

If the last few quarters' numbers are any indication, there is a possibility -- though slim -- that the U.S. could see annual productivity growth as high as 3 percent in coming years. That would be the fastest in almost a decade and the best news for the U.S. economy in a while.

Since the end of an information-technology-related productivity boom that lasted from the mid-1990s to the mid-2000s, the trend rate of productivity growth has appeared to slow to 1 percent per year. There was also a brief surge in productivity during the recession, as firms cut production less than they did worker hours and payrolls, but the jump proved fleeting.

Economists now generally expect productivity growth to be about 2 percent per year, according to a report from the Federal Reserve Bank of San Francisco. Though that’s not what the U.S. saw during the tech bubble, it would be a substantive improvement on the last few years.

But don't get excited quite yet. Many people aren't so optimistic. There are prominent forecasters who expect the coming productivity growth to run at less than 1 percent per year for the next 20 years. Such a fear graces the cover of this week's Economist magazine. Economists including George Mason University's Tyler Cowen are contemplating the possibility of a "great stagnation," a protracted spell of slow productivity growth that leads to a slowdown in the long-term rise of living standards.

What gives Cowen and the stagnation-worriers nightmares is a decade like the 1970s, when average productivity was less than 1 percent per year across the whole economy. From the end of World War II until then, productivity growth had been in the 3 percent to 4 percent range. The 1970s experience highlighted how even small drops in the trend rate of productivity growth lead, over sufficiently long spans of time, to gaping discrepancies in quality of life.

Seeking to explore whether the U.S. is truly headed toward another period of stagnation, I produced a monthly data set of output per man-hour in manufacturing going back to 1939, based on composite data from the Bureau of Labor Statistics and the Federal Reserve. (My data are available here.) The BLS data on the manufacturing sector -- which tends to drive changes in productivity throughout the entire economy -- are quarterly and only go as far back as 1987, eight years before similar quarterly data for nonfarm business productivity became available.

The increased range and frequency of my data set allows us to see the long-term historical trends of productivity growth. It doesn't look good.

The worriers are right to see an incipient return of the 70s productivity slowdown. In the manufacturing sector, the 10-year growth rate of productivity has fallen by more than half in the last decade.

Over the period from 1994 to 2004, the height of the productivity boom, output per man-hour increased by 66 percent. Between 2002 and 2012, productivity growth decreased to about 30 percent. Unless the recent increases in productivity turn into an immediate surge, the U.S. will probably see the slowest manufacturing productivity growth in nearly 30 years.

As can be seen in the accompanying graph, the 10-year trend rate of productivity growth has also slowed sharply across the larger nonfarm business sector, according to BLS data. It is likely to fall to less than 20 percent growth very soon, a steep decline from 10-year growth rates of nearly 35 percent just a decade ago.

If the recent return of productivity growth holds strong, the U.S. could see a second boom. But if we take a longer-term view, the stagnation worriers look increasingly like prophets.